Interest rates to double on new student loans

Financial aid directors at Maryland colleges hope that members of Congress will return from their July 4 recess and reverse the doubling of the interest rate on new federal loans for financially needy students.

"I am actually hoping they come to their senses and make the interest rate lower for our students," said Angela Hovatter, director of financial aid at Frostburg State University, where nearly half of students receive subsidized federal loans. "It's bad enough for them to find jobs in this economy and be able to pay back their student loans without adding additional money to that."

Members of Congress failed to reach an agreement on the interest rate before a deadline Monday and the rate on the subsidized federal loans jumped to 6.8 percent. It had been 3.4 percent. About 30 percent of undergraduate students in financial need receive subsidized Stafford loans, in which the government pays the interest while borrowers are in school.

This higher rate will apply only to new subsidized loans taken out starting this month. Unsubsidized Stafford loans, in which the borrower pays the interest, have been at 6.8 percent for years.

Students with subsidized loans typically graduate with $9,000 in this type of debt, and the doubling of the rate means they will pay $216 more a year in interest, said Mark Kantrowitz, senior vice president and publisher of Edvisors.com, a network of educational resources for parents and students.

Student loans faced a similar interest-rate crisis last year, but Congress eventually agreed to maintain the rate at 3.4 percent for another year. Financial aid directors had their fingers crossed that something similar would happen this time.

"There has been so much discussion. We kept hoping that things would turn out well. It seems now they haven't," said David Horne, director of financial aid at Towson University. "Students will still be able to borrow the same amount of federal loans as before, but this rate change will increase the total long-term cost of their education."

About a dozen proposals on setting education loan rates have been offered up by Congress and the White House.

Some — including the one from President Barack Obama — suggest a combination of the interest rate on the 10-year Treasury note plus a fixed rate for subsidized and unsubsidized loans. Students in some cases would see an initial decrease in borrowing costs, with the Treasury rate now around 2.5 percent. That could quickly change if Treasury rates shoot up.

Other proposals seek to maintain the 3.4 percent rate for subsidized loans. And Sen. Elizabeth Warren, a first-term Democrat from Massachusetts, proposed a 0.75 percent rate for subsidized Stafford loans.

"They are still pretty far apart," said Kantrowitz, who predicts Congress won't act and the rate will remain 6.8 percent.

He added that politicians also disagree on what to do with the money the government generates from the increase in the student loan rate.

Sarah Bauder, assistant vice president for financial aid at the University of Maryland, College Park, said she expects members of Congress and the White House will be able to reach a retroactive agreement.

"Everybody wants the same thing," she said. "They all agree that students should not be paying 6.8 percent."

About 7,000 students, or 29 percent, at the College Park campus receive subsidized Stafford loans. Democratic Rep. Steny H. Hoyer will be meeting with students and school officials Tuesday at the university to talk interest rates and the impact on young borrowers, Bauder said.

Bauder said she likes the idea of tying loans to a market rate, but wants a cap to protect borrowers against steep rate increases.

Congressional Republicans don't want a cap on rates, Kantrowitz said. And though the president's proposal doesn't feature a cap, the White House is open to the idea, he said.

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